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Energy Policy
journal homepage: www.elsevier.com/locate/enpol
China Center for Energy Economics Research, School of Economics, Xiamen University, Xiamen 361005, China
Institute for Studies in Energy Policy, Xiamen University, Xiamen 361005, China
c
Collaborative Innovation Center for Energy Economics and Energy Policy, Institute for Studies in Energy Policy, Xiamen University, Xiamen 361005, China
d
New Huadu Business School, Minjiang University, Fuzhou 350108, China
b
H I G H L I G H T S
art ic l e i nf o
a b s t r a c t
Article history:
Received 12 June 2011
Accepted 8 May 2013
Available online 14 June 2013
The Chinese households that make up approximately a quarter of world households are facing a
residential power tariff reform in which a rising block tariff structure will be implemented, and this tariff
mechanism is widely used around the world. The basic principle of the structure is to assign a higher
price for higher income consumers with low price elasticity of power demand. To capture the non-linear
effects of price and income on elasticities, we set up a translog demand model. The empirical ndings
indicate that the higher income consumers are less sensitive than those with lower income to price
changes. We further put forward three proposals of Chinese residential electricity tariffs. Compared to a
at tariff, the reasonable block tariff structure generates more efcient allocation of cross-subsidies,
better incentives for raising the efciency of electricity usage and reducing emissions from power
generation, which also supports the living standards of low income households.
& 2013 Elsevier Ltd. All rights reserved.
Keywords:
Block tariffs
Residential electricity
Price elasticity of power demand
1. Introduction
Different from the United States (Sueyoshi, 2010), China does
not have a perfect market for wholesale or retail power trade. The
Chinese state-owned power grid companies (State Power Grid
Company and China Southern Power Grid Company) are in charge
of the power transmission, distribution and retailing of the whole
country. The transactions are under the government-regulated
tariffs which are controlled by National Development and Reform
Commission (NDRC) rather than by the market.
n
Corresponding author: Collaborative Innovation Center for Energy Economics
and Energy Policy, Institute for Studies in Energy Policy, Xiamen University,
Xiamen, Fujian, 361005, China. Tel.: +86 5922186076; fax: +86 5922186075.
E-mail addresses: bqlin@xmu.edu.cn, bqlin2004@vip.sina.com (B. Lin).
0301-4215/$ - see front matter & 2013 Elsevier Ltd. All rights reserved.
http://dx.doi.org/10.1016/j.enpol.2013.05.023
1
In China, industrial and commercial power tariff is higher than residential
power tariff, from which residents obtain subsidies. That is the cross-subsidies we
discuss in the paper. On one hand, cross-subsidies make residents enjoy the lower
tariffs. On the other hand, it also makes sure the power companies protable.
Besides cross-subsidies, there are also different forms of subsidy in power sector in
China, for example subsidies for wind or solar power generation and directallowance for lowest income families. Since cross-subsidies are not able to
differentiate the targeted groups, it is lack of efciency. The high income people
who consume more power enjoy larger subsidies than the low income ones who
consume less power. Therefore, to design targeted power tariffs is the key to power
tariffs reform in China.
742
2
The efciency here means a broad term containing economic, social, and
environmental objectives.
3
Source: http://www.tepco.co.jp/e-rates/individual/menu/home/home02-j.
html. Although the United States and Japan have power trading markets like PJM,
their tariffs of residential electricity are nearly in accordance with the forms of
increasing block tariffs.
2. Literature review
In this section, we include two parts. We rst summarize the
existing empirical researches on price elasticity of residential
electricity demand. In the second part, we summarize and compare the applications of inverse elasticity pricing approach in
public utility.
There are a lot of studies on demand functions of residential
electricity aiming at not only the developed countries, but also
some developing countries. Taylor (1975), Halvorsen (1975) and
Bohi (1981) conducted early research on the price elasticity of
residential electricity demand and nished the related work of
data classication. Bohi and Zimmerman (1984) found that the
short-term and long-term price elasticity of residential power
demand was 0.2 and 0.7, respectively. Narayana et al. (2007)
highlighted that the residential power demand is price elastic and
income inelastic in G7 countries. Garcia-Cerrutti (2000) pointed
out the minute impact of American household income on residential power demand based on the estimation of elasticity from
panel data. Silk and Joutz (1997) analyzed the impact of economic
variables, such as actual disposable income, power tariffs, temperature and real rate of interest, on residential power consumption. Filippini (1999) estimated a log-linear model employing
aggregated data referring to 40 cities in Switzerland between
1987 and 1990, and found that the price elasticity of residential
power demand was 0.3. The Australian National Institute of
Economic and Industry Research (2007) found that the price
elasticity of residential power demand was 0.25. Dilaver (2008)
investigated the interrelationship between the residential power
tariff, the household power consumption and the total household
expenditure in Turkey using the structural time series model.
Wasantha and Wilson (2009) found the value of income elasticity
of power demand was between 0.32 and 0.78 and the value of
price elasticity of demand was between 0.62 and 0.16 in Sri
Lankan. Bose and Shukla (1999) made a panel regression of the
parallel data of 19 states in India over 9 years to nd the estimated
result of the price elasticity of Indian residential electricity consumption. Dividing the samples by seasons, Filippini and Pachauri
(2004) took the income, power tariff and dummy variables that
reect household conditions as the independent variables into the
research. Holtedahl and Joutz (2004) studied the impact of household disposable income, population growth rate, residential power
tariff, urbanization rate and temperature condition on the power
demand of Taiwan residents.
However, there are few empirical analyses focusing on the
electricity demand of Chinese households who make up about a
quarter of all households in the world. We conduct a research on
estimating price and income elasticity of residential power
demand in China. Instead of adopting a loglinear model as most
743
744
Fig. 2. The residential electricity consumption and the income per capita.
1
1 m
Pm
1
1 m P m ;
P m
745
j jR
j j
Total expenditure
where k Q =P j j
Non-linear pricing
Two part pricing
Block tariffs
Block tariffs
Flat pricing
Consumption
Fig. 4. The at pricing and the non-linear pricing.
MC j j
j jR
746
ratio9 and the line loss of power transmission and distribution, the
LTMC of residential power is always much higher than the current
power tariff. Lin et al. (2009a) estimated that the LTMC of
residential power is US$0.154 per kW h in 2007. Therefore, if the
tariff of BPC is higher than this standard, it will make the residential
electricity unaffordable for the poorest. With respect to the developed countries experience, the tariff of rst-step power consumption is lower than its LTMC in the rising block tariff mechanism.
Drawing on Taylor's (1975) description of indifference utility
curve, Fig. 5 reects the different residents utility situations in the
at tariffs and the proposed rising block tariffs. The horizontal axis
represents the residential power consumption, and the vertical
axis represents the consumption of other goods. As shown in
Fig. 5, q1 and q2 divide the residential electricity consumption into
three parts: BPC, NPC and LPC. The line AB displays the current
budget constraint line before implementing the rising block tariffs
(with the at tariffs, the budget constraint line is a straight line).
The slope of line AB expresses the ratio of at tariff to average
price of other goods (p0/p). There are two kinds of consumers.
With relatively lower income and less power consumption, the
type I consumers indifference curve MN is tangent to AB at L.
With relatively higher income and more power consumption, the
type II consumers indifference curve SR is tangent to AB at T10.
We assume two block tariff structures: AFGH and ACDE. The slope
of AF is larger than that of AB, so the rst-step power tariff in the
9
The residential power consumption is characteristic of obvious gap between
on-peak and off-peak. The peak load units only turn on for providing the peak
electricity supply. Take the peak load unit in pumped-storage power station as an
example, its utilization rate is 1100 hours annually, around one third of the unit in a
common hydroelectric power station.
10
In fact, because the income of type I and type II consumers are different,
their budget constraint lines won't always be the same. But our analysis does not
aim to compare the utility between the type I and type II consumers. Hence, using
the line AB to represent their budget constraints lines could simplify the gure, but
not make any impact on the result.
Table 1
Results of panel data unit root test.
Variables Method
lnC it
lnI it
lnP it
LLC
Fisher
ADF
LLC
Fisher
ADF
LLC
Fisher
ADF
P-value of original
series
0.3258
0.9999
0.0000
0.0000
1.0000
1.0000
0.0000
0.0004
0.1568
0.0781
0.0000
0.0008
Note: LLC (Levin, Lin and Chut) is a homogeneous unit root test. FisherADF is a
heterogeneous unit root test.
10
The residential power tariff slightly varies with time in each province.
Relatively, it is more effective to reect the disparity of power tariff by the regional
panel data. The power consumption per capita is from China Energy Statistics
Yearbook for related years. The residential power tariff data are adopted from China
State Electricity Regulation Commission (SERC), which are adjusted to the constant
2000 price by consumption price index of residential water and electricity of each
province. The income per capita data are from National Statistics Yearbook for
related years, based on the constant 2000 price by the provincial GDP deator.
12
The lower the price elasticity is, the higher its absolute value will be.
747
748
Table 2
Results of panel data co-integration test.
Pedroni Test:
Alternative hypothesis mode
Statistic
Statistical value
P-value
Panel PP-statistic
Panel ADF-statistic
Group PP-statistic
Group ADF-statistic
2.695938
5.312438
8.308613
8.909563
0.0001
0.0000
0.0000
0.0000
t-Statistic
4.016517
ADF statistic
P-value
0.0000
Table 3
Summary estimators of Model 15.
Model 1
lnI it 2
lnP it 2
1=2lnIit lnP it
nn
0.0447
(0.0211)
0.1272nn
(0.0580)
0.3294nn
(0.1438)
Model 2
Model 3
nnn
0.0558
(0.0265)
0.2189nnn
(0.0698)
0.5261nnn
(0.1717)
Model 4
0.1099nnn
(0.0231)
0.0542
(0.0191)
0.1457nnn
(0.0520)
0.3793nnn
(0.1300)
0.0514nnn
(0.0118)
0.3207nnn
(0.0713)
ln EXP it 2
1=2ln EXP it lnP it
lnI it
lnP it
lnU it
ln TEM it
0.0942nnn
(0.0146)
Model 5
nnn
0.5357nnn
(0.1041)
0.1256nnn
(0.0389)
0.0314nnn
(0.0069)
0.0219
(0.0620)
0.1684nn
(0.0792)
0.1004nnn
(0.0080)
0.0404
(0.1024)
0.2244nnn
(0.1323)
0.4736nnn
(0.0371)
0.1182nn
(0.0502)
0.5363nnn
(0.0720)
0.1117nnn
(0.0266)
0.0333nnn
(0.0034)
Fig. 6. The price elasticity of residential power demand.
nnn nn
and
15
Based on our assumption, there are 371 million households in China in 2007.
The difference between this value and the data from China Population Statistics
Yearbook 2008 is very slight (about 0.5%).
749
Table 4
Population proportion and monthly power consumption in different income groups.
Lowest income
Lower income
Middle income
Higher income
Highest income
o 450
22
35
4.5
450750
26.5
60
4
7501500
24.5
90
3.5
15003000
18
150
3
43000
9
180
2.5
Table 5
Three proposals of the block tariffs based on different income groups.
Group
Proposal 1
Proposal 2
Lowest income
Lower income First-step (73%)n
Middle income
Second-step
Higher income
(18%)
Highest
Third-step (9%)
income
Table 8
The impact on residential power expense.
Proposal Step
Proposal 3
First-step (22%)
First-step (48.5%)
Second-step
(69%)
Second-step
(42.5%)
Third-step (9%)
Third-step (9%)
Note: The percentage in parentheses denotes the population ratio for each
income group.
Table 6
The rising block tariff structure of the three proposals.
3
Proposal Level Interval of consumption per month
(kW h)
BPC
NPC
LPC
090
90150
More than 150
0.131 (p1)
0.247 (p2)
0.402 (p3)
BPC
NPC
LPC
060
60150
More than 150
0.108 (p1)
0.252 (p2)
0.327 (p3)
BPC
NPC
LPC
035
35150
More than 150
0.052(p1)
0.244 (p2)
0.298 (p3)
Table 7
Results of sensitivity analysis of changes in LTMC (US$/kW h).
Change rate of
LTMC (%)
+20
+10
0
10
+20
Proposal 1
Proposal 2
Proposal 3
BPC
NPC
LPC
BPC
NPC
LPC
BPC
NPC
LPC
0.146
0.138
0.131
0.125
0.117
0.270
0.255
0.247
0.239
0.230
0.427
0.414
0.402
0.386
0.377
0.122
0.114
0.108
0.102
0.993
0.275
0.263
0.252
0.246
0.238
0.354
0.341
0.327
0.320
0.312
0.058
0.055
0.052
0.050
0.057
0.266
0.254
0.244
0.236
0.228
0.313
0.305
0.298
0.290
0.281
17
Whether the residential tariff structure is in the light of these three
proposals or in a at rate of US$0.154 per kW h (instead of the actual average of
US$0.070 per kW h), the traditional cross-subsidies between residential and
industrial sectors are fully eliminated, i.e. the cross-subsidies for each tariff band
sum to zero. However, under different tariffs structures, there are various crosssubsidies for each tariff block. Under the at rate, the cross-subsidies for each tariff
block are zero. But under these three block tariffs proposals, the subsidies among
First-step
Secondstep
Thirdstep
First-step
Secondstep
Thirdstep
First-step
Secondstep
Thirdstep
Flat tariffs
Block tariffs
Power expense
(US $)
Ratio
(%)
Power expense
(US $)
Ratio
(%)
4.54
10.51
1.71
1.61
6.63
24.78
2.50
3.80
12.60
1.57
40.75
5.08
3.46
8.24
1.67
1.56
4.46
18.30
2.15
3.46
12.60
1.57
39.96
4.98
2.45
6.88
1.63
1.51
1.90
14.52
1.26
3.19
12.60
1.57
39.27
4.89
(footnote continued)
each block still exist. Generally speaking, there are negative subsidies for highincome people, since their average price is higher than US$0.154 per kW h. The
low-income group with a block price below US$0.154 per kW h would obtain
positive subsidies.
18
Because of the substantial cross-subsidies, the current residential power
tariffs are below the breakeven. The block tariffs analysis are based on the
breakeven prices, assuming that the cross-subsidies has been removed. This is
the reason why power expenses for low income groups under proposed tariffs
should have higher power expenses than that under the current at power tariff.
750
Table 9
The impact on saving energy and mitigating emissionsa.
Proposal 1 Proposal 2 Proposal 3
Electricity conservation (billion kW h)
43.71
Reduction of CO2 emission (million tons) 40.73
33.86
31.55
38.69
36.05
a
Since the tariff levels under the three proposed rising block structures are
higher than the actual rate, some residents become more sensitive and try to
reduce their own power consumption. Assuming that the energy structure of
power generation does not change, the carbon dioxide emissions embodies in per
kW h power will be constant. Therefore, a small level of power consumption
indicates a reduction of emissions.
Acknowledgements
The paper is supported by National Social Science Foundation
of China (Grant No. 12&ZD059), Ministry of Education Foundation
of China (Grant Nos. 10GBJ013, 13YJC790123 and 12JJD790027),
National Natural Science Foundation of China (Grant Nos.
71203186, 71073131 and 71203187), Fundamental Research Funds
for the Central Universities (Nos. 2010221051 and 201122G008),
Social Science School of Xiamen (Grant No. [2013]29).
751
11
Q 0i q0i
Fig. A1. Scenario analysis of price elasticity.
i N
ni
12
13
here, Pi and MCi denote the average power price and marginal cost
of each group. Qi denotes new group amount of residential power
consumption. FC is the xed cost. The equation implies that total
revenue equals total costs.
Thirdly, the inverse elasticity pricing method is written as
follows.
P i MC i
i j R
Pi
Pi
MC i ji j
ji jR
15
here, i represents the price elasticity for each group, and R is the
Ramsey multiplier.
Following Kopsakangas-Savolainen (2004) and Qi et al. (2010),
we introduce a scaling term ki.
ki Q i P i ji j
16
17
14
2 N
N
p1 Q 2 q1 2
p2
n2
n2
18
19
3 N
N
N
p3
p1 q2 q1 3
p2 Q 3 q2 2
n3
n3
n2
20
here, Pi denotes the each block tariff corresponding to three-step
power consumption, BPC, NPC and LPC. q1 and q2 are the thresholds levels of consumption which represent the second and third
steps of the tariff blocks.
752
21
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